Math in Economics

MATH IN ECONOMICS

Math in Economics

Supply and demand is very important to the success of all businesses. It’s important for companies to understand what its customers want and review the trends of how often those items are purchased. When a business is unable to keep items in high demand in stock it hurts the business in many ways. This paper determines gasoline prices, providing the supply and demand curve and how it will affect pricing if a new gas station is opened.

GAS STATIONS

Pricing data was compiled for several gas stations in my area. The gas stations and the prices are as follows (per gallon):

Speedway 1	$1.99
Mobil 1	$2.03
Lukoil	$2.10
BP 1	$2.16
Speedway 2	$2.25
Shell	$2.33
Mobil 2	$2.42
BP 2	$2.47
Speedway 3	$2.62

SUPPLY

“For the many components of a supply chain to work effectively, their activities must be coordinated and synchronized carefully” (Hull, 2001).  Most of the oil in the United States comes from the Middle East, a place where war and tragedy happens often. It would seem that due war, the price of oil would constantly be on the rise because the oil supply would falter. However, recently the costs of gas has decreased significantly, and the oil supply has increased. With profits on the decline, oil companies cut exploratory projects and investments to help protect the company from bankruptcy. “The plunging price of a barrel of oil, which at one point fell more than 70 percent compared with June 2014 levels” (Krauss, 2016).

GAS STATION	PRICE	SUPPLY
Speedway 1	$1.99	50
Mobil 1	$2.03	55
Lukoil	$2.10	65
BP 1	$2.16	70
Speedway 2	$2.25	75
Shell	$2.33	80
Mobil 2	$2.42	85
BP 2	$2.47	90
Speedway 3	$2.62	95

DEMAND

There has been a high demand for oil in the United States. “United States domestic production has nearly doubled over the last several years, pushing out oil imports that need to find another home” (Krauss, 2016). Crude oil capacity helps determine of oil needed to support increases in demand or any losses in oil. Over the past few years, the demand has remained the same at almost 2 million barrels per day due to the tension and warfare in Africa and the Middle East. Surplus production is expected increasing the daily amount to roughly 2.2 million barrels in 2016.

GAS STATION	PRICE	DEMAND
Speedway 1	$1.99	95
Mobil 1	$2.03	90
Lukoil	$2.10	80
BP 1	$2.16	75
Speedway 2	$2.25	70
Shell	$2.33	65
Mobil 2	$2.42	60
BP 2	$2.47	55
Speedway 3	$2.62	50

NEW GAS STATION - ELASTICITY

Opening a gas station requires some research into the area and the demand for gas in that area. Based on the gas prices locally, if a new station were to open in Harlem, it would be very profitable with rates per gallon of $2.05 per the standard deviation. Out of the nine stations surveyed, only three are in the immediate area, to get to the others you must drive a few minutes distance into the Bronx or New Jersey for competitive rates. To have one station locally, in an area that is highly residential would be beneficial.

“Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price” (Elasticity, n.d.). The tables above have shown some change to supply and demand but proved that both were elastic. The average price of gas based on the tables is $2.26 per gallon. Offering a price of $2.05 puts the new station at the top of the list for consumers based on price but makes them the most common station to visit based on location. Right now there are 20 city blocks at minimum between the three stations in Harlem. There are many bridges and highways linking Harlem to the other boroughs, therefore placing a station that is close enough to those main roadways is ideal for profit.

Most people in Harlem travel to New Jersey for gas because the prices are better and the quality as well. Also, a lot of people shop in New Jersey so filling up there is a common thing. However, for those people who do not, travelling so far from their home just to get gas is not an option. They prefer a more convenient locale. Placing a gas station in the heart of Harlem give motorists and business owners more choices in gas options and at a price they can afford without having to pay a toll.

Overall, gas prices are a headache. Some people will travel far and beyond to get a decent price per gallon, not considering how much gas they burn just getting there. The station on one street may have great prices but bad product and the station a few blocks away may have great product but is costly. There has to be some middle ground. Being able to offer great product at reasonable rates supports the supply and demand curve. Even a small shift won’t affect elasticity because the product and price are great.

References Elasticity. (n.d.). Retrieved July 18, 2016, from SparkNotes: http://www.sparknotes.com/economics/micro/elasticity/section1.rhtml Hull, B. (2001). A structure for supply-chain information flows and its application to the Alaskan crude oil supply chain. Logistics Information Management, 15.1(2), 8-23. Retrieved July 18, 2016, from http://search.proquest.com.contentproxy.phoenix.edu/docview/220038102/AFC5D412D0F14C9EPQ/11?accountid=35812 Krauss, C. (2016, June 2). Oil Prices Explained: Signs of a Modest Revival. New York Times. Retrieved July 18, 2016, from http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0 World Liquid Fuel Consumption. (n.d.). Retrieved July 18, 2016, from Gas Prices Explained: http://www.gaspricesexplained.com/#/?section=worldliquid-fuel-consumption